China's Great Wall of Debt

It’s hard to overstate the force of China’s economy. Its Gross Domestic Product amounts to almost 15 percent of the world’s economy; the United States is the only country with a higher GDP. China’s economic moves have global repercussions—just look at how the stock market plunged this week after China announced plans to impose 25 percent tariffs on key American imports.

But while it’s powerful, is China’s economy healthy? That’s the question author and Wall Street Journal finance reporter Dinny McMahon set out to answer when he started working on his latest book, China’s Great Wall of Debt: Shadow Banks, Ghost Cities, Massive Loans, and the End of the Chinese Miracle.

McMahon is the right man to seek that answer. He’s a fellow at the Paulson Institute, the University of Chicago think tank committed to creating sustainable growth in the United States and China who’s covered finance from Beijing for 13 years. McMahon has written extensively on China’s banking and financial sector, focusing on rising debt levels, the strange ebb and flow of urbanization into new cities, and how the state sector influences the country’s economy.

“This book all started as my attempt to make sense of the Chinese economy,” McMahon notes in his introduction.

China’s government works hard to make the world believe China’s economy is a booming and stable economic powerhouse. McMahon’s investigation tells a different story. McMahon says China’s economy is in a precarious financial condition.

Even for an accomplished financial reporter immersed in China’s economy and culture, China’s economy is difficult to understand. Statistics are unreliable and change often happens too quickly for a reporter to get an in-depth understanding. The government influence over Beijing’s banks and Shanghai’s markets are often opaque and difficult to track.

McMahon went underground to understand what is happening in the many shadow cities and empty housing developments that have popped up all around China. Using his academic training, he sifted through documents to find voodoo economics, fudged data, untrustworthy financial reporting and underreported debt. Through his gift of language and ability to connect to Chinese workers, he uncovers why industrial facilities remain so empty, why there is such little work and why consumer satisfaction is so low.

McMahon found the realities on the ground in China didn’t match the picture the Chinese government presented to the world.

“It’s a ‘perceived’ economy. The narrative of China as an ascending superpower is fraught with misconception,” writes McMahon. “There is a staggering mountain of debt that, when the bubble bursts, stands to destroy the global economy.”

How China has been able to continuously rise despite the market-corrections and recessions other countries have faced in the last 18 years? It’s simple, says McMahon. China has succeeded because of aggressive government intervention. China overcomes economic emergencies “not because it is immune to crises but because its government has so far managed to intervene to stave them off. When China’s stock market plunged in 2015, the central government directed fund managers to buy instead of sell and pressured journalists to write only optimistic reports.”

China won’t be able to stave off crises forever. That’s bad news for China and bad news for America as well. Arguably, China is America’s most important economic relationship. If China’s economic strength is an illusion, that partnership could leave the American economy vulnerable and exposed.

American media is starting to wake up to the need to question China’s economic self diagnoses. In January, while reporting on China’s 6.9 percent economic expansion, Keith Bradsher of The New York Times met the news with skepticism, writing: “The pace of growth in China’s economy accelerated last year for the first time in seven years as exports, construction and consumer spending all climbed strongly. At least, that’s what the government says.” Bradsher says the real pace of growth is “anybody’s guess.”

If McMahon is right, his book is a harbinger of a global economic crash that we all need to listen to. Chinese government intervention into its economic development, capital markets and major financial institutions has created a false sense of security both for China and the rest of the world.

To hear directly from Dinny himself, check out this week’s episode of Book Talk with Kory French.